Course Detail (Course Description By Faculty)

This course will analyze complex derivative securities and arbitrage strategies, via mathematical and computational analysis, with a goal of making students familiar with the broad landscape of derivative securities and associated pricing theory.

The first two weeks will review classical Black Scholes option pricing, and place it in a broader context of risk neutral pricing theory. We will then cover some of the computational and numerical methods for applying that theory, such as Monte Carlo path techniques, iterative formulae, trees, and finite difference schemes. These will be put in the context of:

• American and Bermudan exercise options

• Multi-asset options, such as on baskets or ETFs

• Credit default swaps (CDS) and collateralized debt (CDO) tranche pricing

• Bonds, embedded bond options, swaps and swaptions

• Convertibles

Students are expected to possess decent calculus skills, and have some understanding what a partial differential equation is. Students should also possess familiarity with Black-Scholes, either via prerequisites or by instructor approval of prior study experiences.

Homework assignments will be not-quite weekly, consisting of work done in spreadsheets and/or Python coding. The homework problems will generally involve expanding on a framework provided by the instructor to get started. One assignment may be dropped. This course will have a midterm and a final.

Grades